Inflation Proof Annuity Income

Last updated: 14/01/2017

When you buy an annuity with your pension funds, you will have an option of choosing an income that rises each year in line with the Retail Prices Index (RPI) making it, essentially, an inflation proof annuity income.

The main benefit of selecting an inflation proof annuity income option is that it helps to maintain the buying power of your annuity income.

One of the problems with annuities with an increasing income is that they usually have a lower starting income than fixed or level annuities and depending on how long you live, you might end up receiving less income from an escalating annuity over your lifetime than you would from a fixed (or level) annuity.

Inflation Proof Annuity Income Examples

The following table gives a simple example of how an initial inflation proof annuity income differs from that of a fixed / level annuity.

JOINT LIFE ANNUITY EXAMPLES - 50% SPOUSE'S PENSION

MALE AGED /
FEMALE AGED

INITIAL ANNUAL ANNUITY INCOME
(INCOME INCREASING BY RPI)

ANNUAL ANNUITY INCOME
(INCOME FIXED / LEVEL)

M 55 / F 50

£1,680.00

£
3,744.00

M 60 / F 55

£2,076.00

£
4,188.00

M 65 / F 60

£2,568.00

£
4,716.00

M 70 / F 65

£3,156.00

£
5,304.00

The above figures are for illustrative purposes only.
They are based on standard annuity rates for a conventional Lifetime Annuity with no guaranteed period and the income paid in arrears without proportion bought with a pension pot of £100,000.
A Wokingham RG40 postcode was used for quotation purposes. The income figures shown are gross.
Annuity rates checked: 14/01/2017. Source: Money Advice Service Annuity Comparison Tables

For more income examples and information about the effects of inflation proofing an annuity income see our section on Index-Linked Annuity Rates.

The decision about whether or not to choose an inflation proof annuity income is a difficult one to make. Talking to an adviser can help you to choose the best option for you.

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